S'pore bonds finding new love as safe-haven asset

Singapore

INVESTORS are flocking to take cover under Singapore bonds umbrella amid gathering clouds over the global economy.

Even the weakening Singapore dollar has failed to dent their enthusiasm for the fixed income securities, in particular government bonds.

While the Singapore currency fell 0.71 per cent against the US dollar last week, the Singapore Fixed Income (SFI) Index gained 0.22 per cent over the same period. The equity market, as measured by the Straits Times Index (STI), declined 1.18 per cent.

Year-to-date, the SFI has outperformed the STI by 0.42 per cent (+3.13 per cent versus +2.71 per cent). The SFI last outperformed the STI in July 2014.

Gains in the SFI were largely driven by government bonds; the SFI Government Bond Index advanced 0.34 per cent. Corporate bonds remained relatively flat.

The Markit iBoxx SGD corporate total return index touched a new high of 110.2736 on Tuesday as investors looked for safety amid geopolitical concerns.

Jason Khoo, HSBC Bank head of debt equity markets, SEA, said the gains from Singapore's fixed income indices this week have largely been driven by government bonds and, to some extent, it can be attributed to a flight to quality given the geopolitical backdrop and concerns in Europe and the United States over slowing global growth.

"The SGD bond market and, by extension, the Singapore dollar, continues to be attractive to investors given its relative stability, and on a year-on-year basis, the SFI, SFI Corporate and SFI Government Bond Indices have all moved upwards, driven by strong liquidity that has been channelled towards the SGD bond market."

The strength of SGD government bonds is also mirroring that of US Treasuries which have also been moving ahead.

"The correlation of SGD Government bonds to the US Treasuries has been high, with both the current 10-year SGD Govvies and US Treasury seeing a total return of over one per cent in the past two weeks," said Elaine Ngim, Coutts Asia head of fixed income.

Still corporate-bond demand remains strong with local investors confident in domestic issuers who are taking advantage of current low interest rates to tap the market before next year's anticipated rate hikes.

Tan Kee Phong, OCBC Bank head of capital markets, said: "There is a robust pipeline built up for SGD bonds and there are a number of demand and supply factors contributing to this."

"For investors, sentiment is supportive of issuances by acceptable credits, against a backdrop of generally positive economic outlook and low inflationary environment.

"For issuers, there remains ample local currency liquidity that can be tapped," said Mr Tan.

"Coupled with increased expectations of interest rate rises - borne out by the strengthening of the USD vs SGD - this incentivises issuers to borrow now, rather than later, when reference rates rise further eventually," he said.

Year-to-date, SGD corporate bond volume has reached S$20 billion from 120 deals compared with S$14.8 billion from 111 issuances same time last year.

The continued strength of the USD is unlikely to draw away local bond investors as they have SGD funds to deploy, said Clifford Lee, DBS Bank head of fixed income.

"As mentioned a while back, most investors in the SGD bonds are not investing on the back of a foreign currency play i.e. they are not investing in SGD bonds in a short-term anticipation of an appreciation of the SGD. Most of these SGD investors have natural SGD to deploy, so as such they are less sensitive to the recent USD/SGD movements," said Mr Lee.

In fact, Mr Lee believes that when the current weakness in SGD reverses, local debt will be even more attractive as it will draw in offshore investors who see it as a way to profit from both the local currency as well as yield.

"I've in fact said that I'd expect the SGD bond market to get a further boost once the SGD currency play comes into consideration particularly for the offshore investors not based in SGD. But that situation hasn't come about as yet," he said.